Lessons from the Shop Floor

Service companies can cut costs by borrowing techniques from their manufacturing brethren.

When companies in service industries run into trouble meeting capacity or boosting sales, they rarely look to their brethren in manufacturing for solutions. The few companies that have, however, may have discovered a process called sales and operations planning (S&OP) that can help service organizations lower costs and increase customer satisfaction.

S&OP has been successfully employed in manufacturing companies for more than 10 years. It is a way to systematize interdepartmental cooperation and joint planning by ensuring that marketing teams alert operations and IT when they plan a promotion; by increasing communication among product managers, sales executives, and processing-center leaders; and by establishing a regular forum to resolve cross-functional issues, for example. Smarter manufacturers have found that better coordination between the sales and operations departments, as well as planned rather than ad-hoc decision making, can make the difference between profit and loss, and even, sometimes, between survival and failure.

The securities division of a diversified financial-services company learned just how valuable S&OP can be when it attempted to streamline its operations. The division, which serves brokerage clients, employs about 3,000 people, who perform more than 600,000 transactions per month. Its operations department had always followed the unspoken mantra, “Give everything to everybody, as best we can,” which resulted in a sprawling system that tried to serve a variety of customers with no regard for their individual needs. The department was wildly inefficient and the costs of delivering services were far higher than they should have been; for example, skilled customer-service representatives handled almost every client contact. Using the principles of S&OP, the operations department staff worked more closely with the demand side of the business to create a clear set of service policies for different customer segments, they implemented tools to better manage demand, they put processes in place to improve the accuracy of field forecasts and data, and they established metrics to effectively measure and manage performance. As a result, costs decreased by 15 percent, the time it took to open new accounts fell by as much as 60 percent, document-reject rates dropped from 30 percent to 10 percent, and accuracy of response rose across all channels by more than 10 percent.

A tool to improve coordination between functions, S&OP begins with the recognition that different parts of an organization have different goals. In a manufacturing company, for example, production’s desire for limited variety, stable designs, and long lead times is naturally at odds with marketing’s desire for endless variety, extreme design flexibility, and the ability to make last-minute orders. In the absence of a solid planning system, each unit typically looks out for its own interests. The resulting compromise depends on how much power each department has to force its will, rather than on a collective decision about what is best for the company as a whole.

Obviously, manufacturers and service companies implement S&OP differently. Most service companies have little or no inventory, logistical costs, or monthly production runs — all key in manufacturing S&OP. But the fundamental insight remains the same: recognizing that maximizing profitability depends on striking the right balance among competing claims for resources. As in manufacturing, a services S&OP process begins by answering a set of operational questions that have strategic implications, such as:

How long should it take customers to open an account or buy a product from us?

How accurate should our response rates be across channels?

How do we prioritize our new product introductions, taking into account operations and IT capacity?

What flexibility should we build into our operational capacity, taking into account the trade-off between cost and service quality?

Once those decisions are made, a variety of mechanisms must be put in place to ensure that the give and take between marketing and operations happens clearly and consistently. With S&OP, these kinds of questions can all be answered thoughtfully and thoroughly, rather than via bucket brigades.

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